AUDITNG REVIEW

ACCOUNTS RECEIVABLE

Problem 1 (10-23)

Mari Company sells direct to retail customers and also to wholesalers. On January 1, 2017 the
balance of the retail accounts receivable was Php 418,000 while the allowance for doubtful
accounts with respect to retail customers was a credit of Php15,200.

The following summary pertains only to retail sales since 2014:

Credit Doubtful Accounts Doubtful Accounts
Sales Written Off Recoveries
2014 Php 2,220,000 Php 52,000 Php 4,300
2015 2,450,000 59,000 7,500
2016 2,930,000 60,000 7,200
2017 3,000,000 62,000 8,400

Doubtful accounts are provided for as a percentage of credit sales. The accountant calculates
the percentage annually by using the experience of the three years prior to the current year. The
formula is doubtful accounts written off less recoveries expressed as a percentage of the credit
sales for the same period. Total collections from customers amounted to Php2,760,400. This
amount included Php50,000 for which the goods are to be delivered next year. During the year,
the company recorded the bad debts written off as bad debts expense.

Questions:
1. The percentage to be used to compute the allowance for bad debts on December 31,
2017 is
a. 2% c. 1.90%
b. 2.82% d. 1.88%

Credit Sales Accounts w/off Recoveries

2014 2,220,000 52,000 4,300
2015 2,450,000 59,000 7,500
2016 2,930,000 60,000 7,200
-------------------------------------------------------------------
7,600,000 171,000 19,000
======================================

Percentage = Accounts W/off – Recoveries/Total credit sales

= 171,000-19,000/7,600,000
=152,000/7,600,000
=2%

2. How much is the doubtful accounts expense for 2017?

a. Php60,000 c. Php57,000
b. Php83,190 d. Php59,000

Doubtful account expense = 3,000,000 x 2%

= 60,000

3. The doubtful accounts expense for 2017 is overstated by

a. None c. Php1,600
b. Php2,000 d. Php3,000

Reported doubtful account expense (doubtful accounts w/off) 62,000

Less : correct doubtful account expense 60,000
----------
Overstatement in doubtful account expense 2,000
======

4. The ledger balance of the accounts receivable after the necessary adjustments on
December 31, 2017 was a debit of
a. Php654,000 c. Php595,600
b. Php645,600 d. Php346,800
 Accounts Receivable Trade
--------------------------------------------------------------------------------------------------------------------
Beginning balance 418,000 : 62,000 w/off
Sales on account 3,000,000 : 2,710,400 collection excluding
: Advances from
: customers
: (Php50,000)
---------------------------------------------------------------------------------------------------------------------
Ending balance 645,600 :
======

5. The ledger balance of the allowance for bad debts after necessary adjustments on
December 31, 2017 was a credit of
a. Php21,600 c. Php20,600
b. Php44,790 d. Php18,600

Allowance for Doubtful Accounts

---------------------------------------------------------------------------------------------------------------------
Accounts w/off 62,000 : 15,200 Beginning balance
: 60,000 Doubtful acct exp
: 8,400 Recoveries
---------------------------------------------------------------------------------------------------------------------
: 21,600 Ending balance
======

Problem 2

Pau Company has an Allowance for doubtful accounts balance of Php68,000 at January 1,
2017. During 2017, accounts totaling Php94,000 were written off. Accounts written off in prior
years amounting to Php14,000 were recovered during the year. At December 31, 2017, an
aging of its accounts receivable showed:

Amount Probability of Collections

Not yet due Php 340,000 100%
1-30 days past due 240,000 95%
31-60 days past due 20,000 75%
61-90 days past due 30,000 50%
Over 90 days past due 24,000 10%
Additional accounts to be written off 6,000

Required:

Show computations for the following:

a. Doubtful accounts expense for the year 2017.
b. Allowance for doubtful accounts as of December 31, 2017.
c. Amortized Cost of Accounts Receivable at December 31, 2017.

(a) Allowance for Uncollectible Accounts, January 1, 2017 P 68,000

Accounts written off (94,000)
Recovery of accounts previously written off 14,000
Additional accounts written off (6,000)
Allowance for Uncollectible Accounts, December 31, 2017
before adjustments (debit balance) (P18,000)
Required balance in Allowance account based on aging
(5% x 240,000) + (25% x 20,000) + (50% x 30,000)
+ (90% x 24,000) 53,600
Required adjustment/Uncollectible Accounts Expense for 2017 P71,600

(b) Accounts Receivable, December 31, 2017 P654,000

Less Allowance for Uncollectible Accounts 71,600
Net amortized cost P582,400

Problem 3 (10-24)

In December 2017, the accounts receivable controlling account on the books of Camil Company
showed one debit posting and two credit postings. The debit represents receivables from
December sales of Php260,000. One credit was for Php156,800, made as a result of cash
collections on November and December receivables; the second credit was an adjustment for
estimated uncollectibles of Php30,000. The December 31 balance was Php90,000.

When receivables were collected, the bookkeeper credited accounts receivable for the cash
collected. All customers who paid accounts during December took advantage of the 2%
discount.

As of December 1, debit balances in customers’ subsidiary accounts totaled Php59,000. An

adjustment for estimated doubtful accounts of Php6,000 had been posted to the accounts
receivable controlling account at the end of 2016, and no write offs were recorded during 2017.
In addition, a number customers had overpaid their accounts, and as a result, some of the
customers’ subsidiary accounts had credit balances on December 1, No overpayments were
made during December.

Additional data relating December sales follow:

a. Sales of Php10,000 for customer with credit balances in customers’ accounts beginning
of December were shipped December 24, terms FOB shipping point. The company
recorded this transaction by a debit to accounts receivable and credit to sales.
b. A Php10,000 shipment of goods to a customer on December 29, 2017, terms FOB
shipping point, 2/10, n/30, was not recorded as a sale in 2017. The goods were excluded
in the ending inventory in 2017. The freight of Php1,000 was prepaid by Camil
Company. The company recorded the freight by a debit to freight out and credit to cash.
c. A Php15,000 shipment of goods to a customer on December 31, 2017, terms FOB
destination, 2/10; n/30, was recorded as a sale in 2017. The goods were included in the
ending inventory in 2017. The freight of Php1,000 was prepaid by Camil Company. The
company recorded the freight by a debit to freight out and credit to cash.

Questions:
1. Customer’s credit balances at the beginning of December
a. Php21,200 c. Php22,800
b. Php36,200 d. Php31,200

Accounts Receivable
---------------------------------------------------------------------------------------------------------------------
Beginning balance ? 16,800 : 156,800 collections net of discounts
Adjusted sales 260,000 : 30,000 adjustments for estimated
: uncollectible accounts
---------------------------------------------------------------------------------------------------------------------
Ending balance 90,000 :
======

Subsidiary ledger balance, December 1 59,000

Less: A/R controlling account, Dec 1, see above 16,800
+ Estimated uncollectible accounts charged
to Accounts Receivable in 2016 (adj) 6,000
---------- 22,800
---------
Customers’ credit balances (misposting, credit posting
instead of debit posting) 36,200
======

2. Total credit to accounts receivable as a result of collection in December

a. Php160,000 c. Php153,664
b. Php156,800 d. Php163,265

156,800/98% = 160,000

3. Customer’s credit balances at December 31

a. Php21,200 c. Php22,800
b. Php36,200 d. Php31,200
Customer credit balance, Dec 1 31,200
Less: Sale to customer with credit balance (a) 10,000
---------
Customer credit balance, Dec 31 21,200
=====
 4. Adjusted net sales for month of December
a. Php255,000 c. Php265,000
b. Php256,000 d. Php235,000

260,000 + 10,000 (b) – 15,000(c) = 255,000 or

Recorded sales 260,000
+ (b) goods shipped FOB shipping point 10,000
-(c) goods shipped FOB Destination ( 15,000)
-----------
Adjusted sales 255,000
======

5. Adjusted accounts receivable, December 31

a. Php154,000 c. Php122,800
b. Php155,000 d. Php127,800

Accounts Receivable, December 31

----------------------------------------------------------------------------------------------------------------
Unadjusted balance, 12/31 90,000 : 3,200 discounts
Adjustments (b) 10,000 : 15,000 adjustments (c)
1,000 :
Correction on adj to :
Uncollectible accts, Dec 30,000 :
Adj of customer;s credit :
Balance 36,200 :
Correction on adj to :
Uncollectible accts, 12/1 6,000 :
-----------------------------------------------------------------------------------------------------------------
Adjusted balance 155,000 :
======

Adjustments:
Accounts receivable 36,200
Customer’s credit balances 36,200

Accounts receivable 36,000

Allo. For doubtful accts 36,000
(30,000+6,000)

Accounts receivable 11,000

Sales 10,000
Cash 1,000

Sales discounts 3,200

Accounts receivable 3,200

Sales 15,000
Accounts receivable 15,000

Problem 4

The balances of selected accounts taken from the December 31, 2016 statement of financial
position of Pau Company are as follows:

Accounts receivable Php 674,000

Allowance for doubtful accounts 24,000

The following transactions affecting accounts receivable occurred during the year ending
December 31, 2017 (in summary):

Sales (all on account, terms: 2/10, 1/15, n/60) Php 3,000,000

Cash received from customers 3,200,000
From customers paying within the 10-day
discount period 1,764,000
From customers paying within the 15-day
discount period 990,000
From recovery of accounts written off 6,000
 From customers paying beyond the discount period ?
Accounts receivable written off as worthless 22,000
Credit memorandum for sales returns 12,000

Based on assessment of the collectability of the accounts, impairment loss recognized on

accounts receivable is Php30,000.

Required:

Compute Accounts Receivable and Allowance for Doubtful Accounts at December 31, 2017.

Accounts Receivable, December 31, 2016 P 674,000

Sales on account during 2017 3,000,000
Cash received from customers ( 3,200,000)
Cash discounts allowed: (1,764,000 ÷ 98%) x 2% ] P36,000
(990,000 ÷ 99%) x 1% 10,000 ( 46,000)
Recovery of accounts written off 6,000
Accounts written off as worthless (22,000)
Credit memoranda for sales returns (12,000)
Accounts Receivable, December 31, 2014 P 400,000

Allowance for Uncollectible Accounts, December 31, 2016 P 24,000

Recovery of accounts written off 6,000
Accounts written off as worthless (22,000)
Impairment loss on receivables 30,000
Allowance for Uncollectible Accounts, December 31, 2017 P 38,000

The computation may also be conveniently done through T-accounts, as follows:

Accounts Receivable
Balance, beg 674,000 Collections 3,200,000
Sales on account 3,000,00 Cash discounts 46,000
0
Recovery 6,000 Write off 22,000
Sales returns 12,000
Total 3,680,00 Total 3,280,000
0
Balance, end 400,000

Allowance for Uncollectible Accounts

Write off 22,000 Balance, beg 24,000
Recovery 6,000
Impairment 30,000
Total 22,000 Total 60,000
Balance, end 38,000

Problem 5 (10-25)

The accounts receivable control account balance of Mari Company was Php215,300 as of
December 31, 2017. The subsidiary ledger accounts of the company are summarized below.
Credit terms are 60 days net.

Account Name Date Debit Credit Balance

Joyce May 31 5,000 5,000
July 1 3,000 2,000
July 7 5,000 7,000
Sept 1 3,000 4,000
Sept 25 8,000 12,000
Nov 1 3,000 9,000
Dec 10 3,000 12,000

Keana Aug 8 8,400 8,400

Oct 4 8,400 -
Nov 25 22,000 22,000

Lawrenz Jan 1 120,000 120,000 (two

 months, 6%
note)
Mar 1 121,200 (1,200)
Dec 1 100,000 99,800 (2
months, 6%
note)

Paulo Feb 3 10,000 10,000

Aug 3 10,000 20,000

Angel Feb 10 30,000 30,000

Apr 9 30,000 -
May 4 40,000 40,000
July 2 40,000 -
Sept 6 52,780 52,780
Nov 26 2,220 55,000

Alexis July 17 5,000 5,000

Aug 16 4,440 9,440
Sept 30 7,500 16,940
Oct 15 9,440 7,500
Oct 18 6,000 13,500
Dec 20 6,000 7,500

The provision for doubtful account before audit has a credit balance of Php5,000. The provision
for doubtful accounts is to be adjusted to a balance determined as follows:
Accounts not due ½ of 1 %
Accounts 1-60 days past due 2%
Accounts 61-120 days past due 5%
Accounts over 120 days past due 50%

The provision is to be based only on the trade accounts. Except where payments are
earmarked , the oldest items are paid first.

Questions
1. Trade accounts receivable at the end of 2017
a. Php215,300 c. Php216,500
b. Php131,200 d. Php116,500

First 60 days, not over due

Balance Accounts
Dec 31 Not Due 1-60 days 61-120 days Over 120 days
Joyce 12,000 3,000 8,000 1,000
Keana 22,000 22,000
Paulo 20,000 10,000 10,000
Angel 55,000 2,220 52,780
Alexis 7,500 7,500
-------------------------------------------------------------------------------------------------
116,500 27,220 68,280 11,000 10,000
Multiply by: ====== .50% 2% 5% 50%
-------------------------------------------------------------------------------
Required Allo. 136.10 1,365.60 550 5,000
=============================================

Required allowance = 136.10 + 1,365.60 + 550 + 5,000

= 7,051.70
=======

2. Allowance for doubtful accounts at the end of 2017

a. Php6,402 c. Php7,052
b. Php2,052 d. Php5,000
 Allowance for doubtful accounts
--------------------------------------------------------------------------------------------------------
: 5,000 beginning balance
: 2,051.70 Provision
---------------------------------------------------------------------------------------------------------
: 7,051.70 required allowance
=======

3. Doubtful account expense in 2017

a. Php6,402 c. Php7,052
b. Php2,052 d. Php5,000

4. Interest income in 2017

a. Php500 c. Php1,200
b. Php400 d. Php1,700

120,000 x 6% x 2/12 = 1,200

100,000 x 6% x 1/12 = 500
--------
Interest income 1,700
=====

Notes receivable 1,200

Interest income 1,200

Accrued interest receivable 500

Interest income 500

5. Accrued interest income in 2017

a. Php500 c. Php1,200
b. Php400 d. Php1,700

Problem 6

On January 1, 2016, Pau Company sold a piece of land with a carrying amount of
Php12,000,000 in exchange for a 5% promissory note with face amount of Php15,000,000. The
note is payable in annual installment of Php5,000,000 plus accrued interest on the outstanding
balance. The first installment is due on December 31, 2016. There is no established cash price
for the land and the note has no ready market. The prevailing interest rate for a note of this
type is 10%.

Required:

a. Prepare an amortization table (2016 to 2018)

b. Prepare all entries to record the transactions from January 1, 2016 to December 31,
2018

The note is interest-bearing, but the rate of interest of the note (5%) is unreasonably lower than
the prevailing rate (10%) for similar obligation. The present value of the note is determined as
follows:
5 M + (5% x 15 M) = 5,750,000 x 0.9091 P5,227,325
5 M + (5% x 10 M) = 5,500,000 x 0.8264 4,545,200
5 M + (5% x 5 M) = 5,250,000 x 0.7513 3,944,325
Total P13,716,850

Problem 7

Mari Company reports a loan receivable from Sakana Co., in the amount of Php5,000,000. The
initial loan repayment terms include a 10% interest rate plus annual principal payments on
December 31 each year of Php1,000,000. The loan was made on January 1, 2013. Sakana
made the Php500,000 interest payment in 2013, but did not make the Php1,000,000 principal
nor the Php500,000 interest payment in 2014. Mari Company is preparing its annual financial
statements at December 31, 2014. The loan receivable has a carrying value of Php5,500,000
including the Php500,000 interest receivable for 2014. Sakana is having financial difficulty, and
Mari Company has concluded that the loan is impaired. Analysis of Sakana’s financial
conditions indicates the principal and interest currently due can be probably collected, but it is
probable that no further interest can be collected. The probable amount and timing of the
collection is determined to be as follows:
 December 31, 2015 Php 1,750,000
December 31, 2016 2,000,000
December 31, 2017 1,750,000

Questions:
1. The present value of the expected future cash flows as of December 31, 2014 is
a. Php4,585,500 c. Php4,558,500
b. Php5,500,000 d. Php6,000,000
e. answer not given

Date Annual Cash Inflow PV Factor Amount

12/31/15 1,750,000 .9091 1,590,925
12/31/16 2,000,000 .8264 1,652,800
12/31/17 1,750,000 .7513 1,314,775
--------------
4,558,500
========

2. The loan impairment for the year 2014 is

a. Php941,500 c. Php558,500
b. Php500,000 d. Php0
e. answer not given

Carrying amount of loan 5,500,000

Less: Present value of the loan 4,558,500
--------------
Impairment loss 941,500
========

3. How much is the interest income for the year 2015, assuming that Mari Company’s
assessment of the collectability of the loan has not changed
a. Php326,435 c. Php485,650
b. Php455,850 d. Php326,435
e. answer not given

4. How much is the interest income for the year 2016, assuming that Mari Company’s
assessment of the collectability of the loan has not changed
a. Php326,435 c. Php159,078
b. Php455,850 d. Php175,000
e. answer not given

5. How much is the carrying amount of the loan receivable as of December 31, 2016
a. Php3,264,350 c. Php1,590,785
b. Php4,558,500 d. Php1,750,000
e. answer not given

Reduction to
Date Payment Interest Income(10%) Principal Carrying value
12/31/2014 4,558,500
12/31/15 1,750,000 455,850 1,294,150 3,264,350
12/31/16 2,000,000 326,435 1,673,565 1,590,785
12/31/17 1,750,000 159,215 1,590,785 -

Problem 8

On January 1, 2016, Mari Company sold a tract of land that was acquired several years ago for
Php5,600,000. Mari Company received a three-year, non-interest bearing note for
Php12,000,000 in exchange for land . There is no readily available market value for the land
but the current market rate of interest for comparable notes is 15%. The note is payable in
equal annual installments of Php4,000,000 every December 31, starting December 31, 2016.
Present value of 1 for three periods at 15% is 0.6575. Present value of an ordinary annuity of 1
for three periods at 15% is 2.2832.

Required:
 a. What is the amount of interest revenue recognized in Mari Company’s income statement
from 2016 to 2018?
b. What is the carrying amount of the note at December 31, 2016 and 2017?
c. What amounts of the note shall be classified as current assets and non-current assets
at December 31, 2016 and 2017?

FV Php 12,000,000
PV (4,000,000 x 2.2832) 9,132,800
---------------------------
Discount on Notes receivable 2,867,200
===============

Notes Receivable 12,000,000

Land 5,600,000
Gain on sale of land (9,132,800-5,600,000) 3,532,800
Discount on Notes Receivable 2,867,200

Effective Interest Principal Carrying Value

1/12016 9,132,800
2016 9,132,800x15%=1,369,920 4,000,000 6,502,720
2017 6,502,720x15%= 975,408 4,000,000 3,478,128
2018 3,478,128x15%= 521,719
521,872 -

Problem 9

Pau Company has an Allowance for doubtful accounts balance of Php68,000 at January 1,
2017. During 2017, accounts totaling Php94,000 were written off. Accounts written off in prior
years amounting to Php14,000 were recovered during the year. At December 31, 2017, an
aging of its accounts receivable showed:

Amount Probability of Collections

Not yet due Php 340,000 100%
1-30 days past due 240,000 95%
31-60 days past due 20,000 75%
61-90 days past due 30,000 50%
Over 90 days past due 24,000 10%
Additional accounts to be written off 6,000

Required:

Show computations for the following:

a. Doubtful accounts expense for the year 2017.
b. Allowance for doubtful accounts as of December 31, 2017.
c. Amortized Cost of Accounts Receivable at December 31, 2017.

(a) Allowance for Uncollectible Accounts, January 1, 2017 P 68,000

Accounts written off (94,000)
Recovery of accounts previously written off 14,000
Additional accounts written off (6,000)
Allowance for Uncollectible Accounts, December 31, 2017
before adjustments (debit balance) (P18,000)
Required balance in Allowance account based on aging
(5% x 240,000) + (25% x 20,000) + (50% x 30,000)
+ (90% x 24,000) 53,600
Required adjustment/Uncollectible Accounts Expense for 2017 P71,600

(b) Accounts Receivable, December 31, 2017 P654,000

Less Allowance for Uncollectible Accounts 71,600
Net amortized cost P582,400

Problem 10
Camil Company’s balances as at December 31, 2016, before year end adjustments follow:
Debit Credit
Accounts receivable Php 300,000
Allowance for doubtful accounts,
Before adjustments Php 3,000
Merchandise inventory 400,000
Net sales 1,000,000
Cost of sales 800,000

Additional information and data for adjustments below:

a. The company sells at a markup of 20% based on sales. All customers are within a four-
day delivery area.
b. On December 27, 2016, Camil authorized a customer to return , for full credit, goods
shipped and billed at Php30,000 on December 14, 2016. The returned goods were
received by Camil on January 4, 2017, and a Php30,000 credit memo was issued pn the
same date. The goods were not included in the ending inventory. –AR; -Net Sales ;
30,000 ;( 30,000 x 80% = 24,000) + Invty, -COS 24,000.
c. A Php40,000 shipment of goods to a customer on December 31, 2016, terms FOB
shipping point, 2/10, n/30, was not recorded as a sale in 2016. The goods were included
in the ending inventory in 2016. +AR, + Net Sales , 40,000; (40,000 x 80%=32,000) –
Invty, + Cost of Sales, 32,000.
d. A Php50,000 shipment of goods to a customer on December 30, 2016 terms FOB
destination, 5/10, n/30, was recorded as a sale in 2016. The goods were excluded in the
ending inventory in 2016. –AR, -Net Sales, 50,000 (50,000 x 80% = 40,000) + Invty, -
Cost of Sales, 40,000
e. A Php20,000 shipment of goods to a customer on December 29, 2016, terms FOB
shipping point. 3/10, n/30, was recorded as a sale in 2016. The goods were not included
in the ending inventory in 2016.
f. Based on the aging of the accounts receivable, the allowance for doubtful accounts
would be Php15,000. Provision = 15,000 – 3,000; + Provision 12,000 (+ Doubtful
Accounts)

Questions:
1. Adjusted balance of accounts receivable as of December 31, 2016
a. Php350,000 c. Php289,000
b. Php260,000 d. Php290,000

2. Merchandise inventory as of December 31, 2016

a. Php376,000 c. Php408,000
b. Php432,000 d. Php440,000

3. Net sales for the year 2016

a. Php990,000 c. Php1,010,000
b. Php960,000 d. Php910,000

4. Cost of sales for the year 2016

a. Php808,000 c. Php768,000
b. Php792,000 d. Php824,000

5. Net realizable value of accounts receivable as of December 31, 2016

a. Php272,000 c. Php245,000
b. Php270,000 d. Php278,000

( 260,000-15,000 = 245,000)

Problem 11

Pau Company properly reported the following balances on December 31, 2016:
Accounts receivable Php 1,500,000
Allowance for doubtful accounts 90,000
Accrued interest receivable-loan 320,000
Loan receivable 4,000,000

‘
Additional information:
a. During 2017, Pau Company recorded credit sales of Php9,000,000 and interim provision
for doubtful accounts at 2% of credit sales.

Accounts of Php100,000 were written off during the year but accounts of Php20,000
were subsequently recovered.

The balance of accounts receivable on December 31, 2017 amounted to Php2,000,000

and aged as follows:

Classification Balance Estimated Uncollectible

1-60 days Php 1,000,000 1%
61-120 days 400,000 5%
121-180 days 300,000 10%
181-360 days 200,000 25%
More than one year 100,000 Php40,000 is definitely uncollectible,
the balance is 80% uncollectible

c. The balance of the loan receivable represents the remaining amount loaned to Alexis
Company on January 1, 2015. The total amount loaned in 2015 was Php5,000,000.
The terms of the loan require principal payments of Php1,000,000 each year for 5
years plus interest at 8%. The first principal and interest payment was due on
January 1, 2016. Alexis Company made the required payments during 2016 and
2017. However, during 2017 Alexis Company began to experience financial
difficulties, requiring Pau Company to reassess the collectability of the loan. On
December 31, 2017, Pau Company determines that the remaining principal payment
will be collected but the collection of the interest is unlikely.

Questions:
1. Allowance for doubtful accounts of accounts receivable, 12/31/2017
a. Php158,000 c. Php198,000
b. Php170,000 d. Php210,000
e. answer not given
1-60 days 1,000,000 x 1% 10,000
61-120 days 400,000 x 5% 20,000
121 -180 days 300,000 x 10% 30,000
181-360 days 200,000 x 25% 50,000
More than 1 yr 60,000 x 80% 48,000
(100,000-40,000 = 60,000) ------------
158,000 Required Allowance, 12/31/17
======

2. The net realizable value of accounts receivable, 12/31/2017

a. Php1,790,000 c. Php1,830,000
b. Php1,802,000 d. Php1750,000
e. answer not given

(1,960,000 – 158,000 = 1,802,000

3. The over(under) statement of the recorded doubtful accounts expense.

a. Php20,000 overstatement c. Php8,000 overstatement
b. Php20,000 understatement d. Php8,000 understatement
e. answer not given

Allowance for Doubtful Accounts

------------------------------------------------------------------------------------------------------------------
w-off 40,000 : 90,000 beginning balance
w-off 100,000 : Provision based on credits
: 180,000 sales (9,000,000 x 2%)
: 20,000 Recoveries
: 8,000 additional provision
------------------------------------------------------------------------------------------------------------------
: 158,000
 4. The loan impairment loss on December 31, 2017
a. Php420,000 c. Php630,000
b. Php210,000 d. P0
e. answer not given

5. The interest income for 2017

a. Php223,200 c. Php240,000
b, Php143,200 d. Php0
e. answer not given
1,000,000 x 1.00 1,000,000
1,000,000 x 0.93 930,000
1,000,000 x 0.86 860,000
--------------
Total PV of the loan 2,790,000
========
Total carrying value 3,000,000
Total PV 2,790,000
--------------
Impairment loss 210,000
========
Interest
Date Collections Income (8%) Amortization Carrying Value
1/1/2016 2,790,000
12/31/2016 1,000,000 1,000,000 1,790,000
12/31/2017 1,000,000 143,200 856,800 933,200

Problem 12

You obtained directly from Pau Corporation, your client, and reviewed a schedule of accounts
receivable as of December 31, 2016. The schedule shows that receivable amounts to
Php1,660,000. This amount does not agree with the balance in the accounts receivable ledger
account. The difference may be shown below. Below are your audit findings:
a. A special goods costing Php72,000, fabricated to order for a customer , was finished
and specifically segregated in back part of the shipping room on December 31, 2016.
The customer was billed on that date and the goods excluded from inventory although it
was shipped on January 3, 2017.

b. A promissory note was issued by a customer to Pau Corporation for goods purchased
worth Php200,000. The promissory note carries an interest of 12% per annum with a
term of 60 days dated November 30, 2016. This was reflected as part of accounts
receivable . No interest was accrued as of year end.

c. A review of pertinent records showed that on December 24, 2016, Php160,000 of trade
accounts receivable was factored without recourse for Php152,000. Client recorded this
transaction by debiting cash and crediting notes payable-finance Company for
Php152,000.

d. A review of sales documents revealed that goods having a selling price of Php100,000
were shipped to a customer FOB shipping point on December 31, 2016, but the sale
was recorded on January 4, 2017. The goods were not included in the December 31,
2016 inventory. Client’s gross profit rate is 40% of sales.

Pau Corporation uses the allowance method and estimates doubtful accounts at 1% of net
sales. After consulting with the credit manager, you believe that this is a reasonable estimate.
Below is a transcript of the allowance for doubtful accounts in the general ledger

Allowance for Doubtful Accounts

Debit Credit Balance
Beginning balance Php 100,000 Php 100,000
11/25/2016 Php 30,000 70,000
12/31/2016,GL Prov 80,000 150,000

11/25/2016 : To write-off the following known worthless accounts:

Allowance for doubtful accounts 30,000
Accounts receivable 30,000
Joyce Php 8,000
Paulo 3,600
Dhan 6,400
 Alexis 3,960
Angel 6,040
--------------------
Php 30,000
===========
12/31/2016: To record the doubtful account expense for the year ending December 31, 2016,
computed as follows:

Allowance for Doubtful Accounts

------------------------------------------------------------------------------------------------------------
: 100,000 beginning balance
Write off 30,000 : 80,000 Provision
:
--------------------------------------------------------------------------------------------------------------
: 150,000 Required Allowance
(15M x 1%)

Doubtful account expense 80,000

Allowance for doubtful accounts 80,000

On January 10, 2017, Php6,000 was received from Dhan in settlement of this account.

Questions:
1. The amount of Trade Accounts receivable to be reported in the audited statement of
financial position at December 31, 2016.
a. Php1,660,000 c. Php1,408,000
b. Pho1,420,000 d. Php1,400,000
e. answer not given

Accounts Receivable, unadjusted balance

Per Subsidiary Ledger Php 1,660,000
Note Receivable ( 200,000)
Factored A /R ( 160,000)
Sales, FOB shipping point 100,000
------------------------
Adjusted A/R Php 1,400,000
==============

2. The allowance for doubtful accounts to be reported in the audited statement of financial
position at December 31, 2016 is
a. Php223,000 c. Php151,000
b. Php229,000 d. Php221,000
e. answer not given

Allowance for doubtful accounts

------------------------------------------------------------------------------------------------------------------
: 100,000 Beginning balance
W-off (correct addition) 28,000 : 151,000 Provision (15M+100K) x 1%
-------------------------------------------------------------------------------------------------------------------
: 223,000 Required allowance

Since the basis of 1% is 15,000,000 therefore the amount of 150,000 is the

amount of provision and not the required allowance, thus we need to
recompute because of adj to sales of Php100,000. Adjusted sales is 15M
+.1M = 15.1M)

3. The doubtful accounts expense to be reported in the audited income statement for the
year ending December 31, 2016 is
a. Php229,000 c. Php221,000
b. Php223,000 d. Php151,000
e. answer not given
 4. The net increase(decrease) in the ending inventory resulting from audit adjustments is
a. Php72,000 c. (Php60,000)
b. Php132,000 d. no effect
e. answer not given

The audit adjustments did not result to any changes in inventory

5. The net increase (decrease) in net sales from audit adjustments is

a. Php100,000 c. (Php120,000)
b. (Php20,000) d. No effect
e. answer not given

Sales, FOB shipping point, P100,000

Problem 13

Pau Company showed the following balances on December 31, 2015:

Accounts receivable Php 2,000,000
Allowance for doubtful accounts ( 60,000)

The following transactions transpired for Pau Company during the year 2016:
a. On May 1, received a Php300,000, six month, 12% interest bearing note from Mari
Company, a customer, in settlement of an account.
b. On June 30, factored Php400,000 of its accounts receivable to a finance company. The
finance company charged a factoring fee of 5% of the accounts factored and withheld
20% of the amount factored.
c. On August 1, Pau Company discounted the Mari Company note at the bank at 15%.
d. On November 1, Mari Company defaulted on the Php300,000 note. Pau Company paid
the bank the total amount due plus a Php12,000 protest fee and other bank charges.
e. On December 31, Pau Company assigned Php600,000 of its accounts receivable to a
bank under a non notification basis. The bank advanced 80% less a service fee of 5%
of the accounts assigned. Pau Company signed a promissory note for the loan.
f. On December 31, Pau Company collected from Mari Company in full including interest
on total amount due at 12% since default date.
g. On December 31, it is estimated that 5% of the outstanding accounts receivable may
prove uncollectible.

Questions:

1 Amount of cash received on June 30 factoring

a. Php200,000 c. Php380,000
b. Php300,000 d. Php304,000
Accounts Receivable factored 400,000
Less: Service Charge (400,000 x 5%) 20,000
Receivable from factor (400,000 x 20%) 80,000
---------- 100,000
-----------
Amount of cash received 300,000
=======

2. Amount of cash received on August 1 discounting

a. Php300,000 c. Php306,075
b. Php318,000 d. Php329,925

Principal Php 300,000

+Interest over full credit period
( 300,000x12%x6/12) 18,000
----------------------
Maturity value 318,000
Less: Discount (318,000x15%x3/12) 11,925
----------------------
Net proceeds 306,075
=============
 3. Amount paid on November 1 default on the Php300,000 note.
a. Php330,000 c. Php312,000
b. Php318,000 d. Php336,600

Maturity value 318,000

Protest fee 12,000
------------
Total amount paid 330,000
=======

4. Amount of cash received on December 31 assignment of accounts receivable.

a. Php480,000 c. Php430,000
b. Php450,000 d. Php415,000

Notes payable (600,000 x 80%) 480,000

Less: Service fee (600,000x5%) 30,000
-----------
Amount received 450,000
======

5 Amount of cash received on December 31 collection of the account of Mari

Company.
a. Php330,000 c. Php312,000
b. Php318,000 d. Php336,600
Total cash paid (No.3) 330,000
Add: Interest (330,000x12%x2/12) 6,600
-----------
Amount received 336,600
======

6 The net realizable value of the accounts receivable is

a. Php2,000,000 c. Php1,330,000
b. Php1,900,000 d. Php1,235,000
Accounts receivable unassigned Php 700,000
(2,000,000-300,000-400,000-600,000)
Accounts receivable assigned 600,000
---------------------
Total 1,300,000
Less: Allo for D/A (1,300,000 x 5%) 65,000
--------------------
Net Realizable Value 1,235,000
============

Problem 14

Kapuso Bank has a Php20,000,000 loan to Camil Realty, which was invested by the latter in
real estate development. Due to the economic downtrend in the real estate business, Camil
Realty is experiencing declining sales and is likely to default on its obligation to Kapuso Bank.
Camil Realty requests for a restructuring of its loan with Kapuso Bank. Prevailing market rate of
interest for similar obligations at the time of restructuring is 8%. Accrued interest receivable on
the loan at December 31, 2016 is Php2,000,000, based on stated interest rate of 10%.
For each of the following alternative restructuring arrangements, determine the amount of the
impairment loss to be recognized by Kapuso Bank , and give the entry in the books of the
company to record impairment. (Round off present value factors to four decimal places)

Alternative 1
) Reduction of principal to Php18,000,000
) Condonation of accrued interest
) Extension of maturity date to December 31, 2018
) Reduction of interest rate to 8%, payable annually on December 31.
Carrying value (20 M + 2M) 22,000,000
Present value of future cash inflows:
Principal due on 12/31/16 (18M x 0.8264) 14,875,200
Interest for 2 years
18M x 8% = 1,440,000; 1,440,000 x 1.7355 2,499,120 17,374,320
-----------------------------------
Impairment loss P 4,625,680
 Entry: Restructured Notes Receivable 17,374,320
Impairment Loss – Receivables 4,625,680
Notes Receivable 20,000,000
Interest Receivable 2,000,000

Alternative 2
) Condonation of accrued interest
) Principal amount of Php4,000,000 plus interest on the unpaid principal reduced to 8%,
payable in annual instalments to begin December 31, 2017.
Carrying value (20 M + 2M) 22,000,000
Present value of future cash inflows:
4M + (8% x 20M) = 5,600,000 x 0.9091 5,090,960
4M + (8% x 16M) = 5,280,000 x 0.8264 4,363,392
4M + (8% x 12M) = 4,960,000 x 0.7513 3,726,448
4M + (8% x 8M) = 4,640,000 x 0.6830 3,169,120
4M + (8% x 4M) = 4,320,000 x 0.6209 2,682,288 19,032,208
Impairment loss 2,967,792
Entry: Restructured Notes Receivable 19,032,208
Impairment Loss – Receivables 2,967,792
Notes Receivable 20,000,000
Interest Receivable 2,000,000

Alternative 3
) Payment of the accrued interest on the date of restructuring (December 31, 2016)
) Extension of maturity date of the loan to December 31, 2018, with interest during
extended term at 7% payable on December 31, 2017 and 2018.

Carrying value 20,000,000

Present value of future cash inflows:
Principal due on 12/31/16
20M x 0.8264 16,528,000
Interest due on 12/31/15 and 12/31/16
20M x 7% = 1,400,000; 1,400,000 x 1.7355 2,429,700 18,957,700
Impairment loss 1,042,300
Entry: Restructured Notes Receivable 18,957,700
Impairment Loss – Receivables 1,042,300
Notes Receivable 20,000,000

Cash 1,400,000
Interest Receivable 1,400,000

Alternative 4
) Extension of maturity date to December 31, 2018
) Interest at 10% on the carrying value of the loan (Php22,000,000) payable December
31, 2017 and December 31, 2018.
Carrying value 22,000,000
Present value of future cash inflows:
Principal due on 12/31/16
22M x 0.8264 18,180,800
Interest due on 12/31/15 and 12/31/16
22M x 10% = 2,200,000;
22,000,000 x 1.7355 3,818,100 21,998,900
--------------
No Impairment loss 1,100
==========

due to rounding off, but it hould be zero)

No entry is required for the restructuring.

The present condition of Camil Realty indicates that it has the ability to meet the modified terms
as indicated.
Problem 15

You are engaged in the audit of Camil Company, a new client, at December 31, 2016. You
review the following notes receivable and other related interest income accounts in the general
ledger.

Notes Receivable
Debit Credit Balance
Beginning balance 1,700,000 1,700,000
April 1, 2016 250,000 500,000 1,450,000
Feb 31, 2016 100,000 1,350,000

Interest Income
Debit Credit Balance
April 1, 2016 180,000 180,000

Additional Information:
A. The beginning balance of the notes receivable is composed of the following:
* Note received from sale of machinery on January 1, 2015 costing Php800,000
with accumulated depreciation of Php450,000. The company receives as
consideration Php200,000 and a noninterest bearing note for Php300,000 due
annually in equal amounts of Php100,000 every December 31, starting
December 31, 2015. The prevailing rate of interest for a note of this type is
12%. The company made the following entry on January 1, 2015:
Cash 200,000
Notes receivable 300,000
Accumulated depreciation 450,000
Equipment 950,000
The company credited the notes receivable account when it received the
Php100,000 annual payments on December 31, 2015. The same entry was
made on December 31, 2016 regarding the collection.

* Note receivable from sale of plant dated April 1, 2015 amounts to Php1,500,000
which bears interest at 12% per annum. No gain or loss was realized from sale.
The note is payable in 3 annual installments of Php500,000 plus interest on the
unpaid balance every April 1. The initial principal and interest payment was
made on April 1, 2016. The company made the following entry:

Cash 680,000
Interest revenue 180,000
Notes receivable 500,000
You found out that no accrual of interest was made in 2015 and 2016.

B. The entry on April 1, 2016 represents the note received when it sells equipment from the
ABC Company on April 1, 2016. The equipment cost Php1,000,000 and has
accumulated depreciation of Php400,000 on the date of sale. The company receives as
consideration Php350,000 and a noninterest bearing note for Php250,000 due on April
1, 2020. The prevailing rate of interest for a note of this type is 10%. The following
entries were made by the company on April 1, 2016:
Cash 350,000
Notes receivable 250,000
Accumulated depreciation 400,000
Equipment 1,000,000
No additional entry was made on December 31, 2016.
Questions:
1. The adjustment to retained earnings as of January 1, 2016.
a. Php0 c. Php403,912
b. Php254,002 d. Php375,180

Unrecorded gain on machinery 90,180

Unrecorded interest income- Note receivable
from sale of machinery 28,822
Unrecorded accrued interest income- receivable
from sale of plant (1,500,000x12%x9/12) 135,000
------------
Net adj to RE-1/1/2016 254,002
=======
Proceeds from sale Php 200,000
 Add: PV of cash inflows (100,000x2.4018) 240,180
----------------------
Total Selling Price 440,180
Carrying value (800,000-450,000) 350,000
---------------------
Gain on sale 90,180
============

Amortization Table
Principal
Date Collections Interest Inc Payment Carrying value
1/1/15 240,180
12/31/15 100,000 28,822 71,178 169,002
12/31/16 100,000 20,280 79,720 89,282
12/31/17 100,000 10,718 89,282 -

2. The total interest income in 2016

a. Php33,086 c. Php168,086
b. Php155,280 d. Php200,280

Sale of machinery 20,280

Sale of plant (1,500,000x12%x3/12) +
(1,000,000x12%x9/12) 135,000
Sale of equipment 12,806
------------
Total Interest Income 2016 168,086
=======

FV of Note for sale of equipt 250,000

PV -250,000 x .6830 (4 period@10%) 170,750
-----------
Discount on NR 79,250
=======
Date Interest Income Carrying value
4/1/16 170,750
12/31/16 170,750x10%x9/12=12,806 183,556
4/1/17 170,750x10%x3/12= 4,269 187,825
12/31/17 187,825x10%x9/12=14,087 201,912
4/1/18 187,825x10%/3/12= 4,696 206,608
12/31/18 206,608x10%x9/12=15,496 222,104
4/1/18 206,608x10%x3/12= 5,165 227,269
12/31/19 227,269x10%x9/12=17,045 244,314
4/1/20 227,269x10%x3/12= 5,682
5,686 250,000

3. Current portion of long-term receivables as of December 31, 2016.

a. Php500,000 c. Php655,280
b. Php589,282 d. Php683,556

Current portion of long term debt

Sale of plant 500,000
Sale of machinery 89,282
-----------
589,282
======
4. Noncurrent receivables as of December 31, 2016.
a. Php500,000 c. Php655,280
b. Php589,282 d. Php683,556

Non-Current portion of long term debt

Sale of plant 500,000
Sale of equipment(table 12/31/16) 183,556
-----------
683,556
======
5. Assuming that none of the errors were detected and corrected in 2016, the net
income in 2016 would be
a. overstated by Php66,444 c. overstated by Php91,164
b. overstated by Php79,250 d. overstated by Php11,912

Interest income from sale of machinery 20,280

Interest income from sale of plant (180,000-135,000) ( 45,000)
Interest income from sale of equipment 12,806
----------
Net overstatement of income ( 11,914)
=====